There have been allegations in the media that Bank of Uganda printed money for the 2011 elections, which led to the high inflation rate at the time.
Paul Busharizi and Moses Walubiri talked to the Central Bank governor, Tumusiime Mutebile, about the allegation.
Below are excerpts from the interview
Q Please clarify the allegations that BOU printed money for the 2011 elections and that there is a correlation with the inflation episode the country experienced in 2011. What assurances can BOU give the public that we will not have a repeat of the 2011 inflation episode?
If readers were to examine the budget data for the 2010/11 financial year, they would see that the net amount of money lent by the BOU to the Government in that year was only sh94b, which is less than one quarter of one per cent of GDP, and this includes the funds lent by the BOU to government for the purchase of military equipment from Russia, which loans were in US dollars.
Consequently, the small amount of net financing of government by the BOU in that financial year had no significant impact on money supply growth or inflation. The rise in inflation in 2011 was caused by a combination of food supply shocks, exchange rate depreciation and rapid growth of borrowing by the private sector.
Since 2011, the BOU has modernised its monetary policy framework to strengthen its tools to fight inflation. The fact that annual core inflation has averaged only 4.8% over the last two years is testament to the effectiveness of the new monetary policy framework. Under this framework, the Government now finances all of its domestic borrowing by issuing Treasury Bills and bonds to the private sector, not by borrowing money, however small, from the BOU.
How much can BOU influence the spending decisions of the Government?
Government spending decisions, on all items in the budget, are determined by Parliament when it appropriates the budget or supplementary budgets. The BOU has no role in these decisions.
Following the last elections, BOU was aggressive in trying to tame inflation using whatever tools available to them. What has BOU learnt from the experience going forward?
The experience has taught us what we already knew, that inflation is caused by a rapid increase in supply of money, which in most cases, arises from decisions taken in order to control pressures on the supply side of the economy.
The supply side of the economy is the production side.
Under some circumstances, the Government has something to do with control of inflation on that side of the economy. But BOU cannot affect results on the supply side of the economy. BOU can only affect results on the demand side.
When you intervened to mop up excess liquidity, lending rates went up and there was stress on the business community. If you were to do it again, would you do it the same way?
We would go about it the same way, but we would be cautious and take precautions not to exacerbate the supply side pressures of the economy.
You have said previously that the right thing to do is to clamp inflation down whenever noticed. How are you going to be more cautious?
One of the most important things we learnt in the 2011 inflation is that if you overreact, you worsen the situation. So, your reaction must be perfectly consistent with the projected growth rate of the economy so that you are not adding on the supply side of the economy but you are gradually reducing demand.
It has to be gradual so that you do not affect expectations that the inflation will be reduced. If you suddenly react and put a stop, you would have affected more than simply the price of goods. You will affect expectations of the investors about BOU’s ability to control inflation.
The banking industry suffered two bank closures in the last two years. Is this a cause for alarm to the Central Bank?
Whenever a bank loans disproportionate credit, this is a matter that should cause concern in the bank. Unless commercial banks have enough freedom to know how to control rising percentage of credit, it will become completely ungovernable and will have to face pressure from the Central Bank supervision to ensure that they reduce this rate of credit expansion.
Other than that, if the rate of credit expansion is controllable, there is no problem.
However, it is worth noting that over the last few months, we have seen a significant reduction in the amount of bad debts.
The shilling is depreciating possibly because of the impending festive season and low peak in the coffee harvest. Do we see inflation rising in the coming months?
Since the introduction of the monetary policy framework as a core element in the fight against inflation, we have been adjusting the rate whenever we suspect that the rate of increase is beyond our projected rate of increase in the future.
So, we raise the Central Bank lending rate whenever this is the case. This is because in our judgment, any rise in inflation that has taken place is not likely to be beyond the expected future price increases.
So, current inflation is not likely to increase to a level that is higher than the expected growth rate of the economy and the anticipated growth rate of the inflation. That is 5% inflation and 7-8% in GDP growth.
Has the Government fully reimbursed the BOU the money you lent to it to purchase fighter jets?
The loan extended by the BOU was repaid from the Consolidated Fund when Parliament approved this in 2011.
There is one other thing I should have said. I referred to the Government purchase of fighter jets in 2011 and several allegations have been made that this money has never been paid to BOU. I want to say explicitly that the loan from the bank for the fighter jets was repaid from the Consolidated Fund account because Parliament approved disbursement of this money in 2011.
Could you clarify on the progress and future of the EAC single currency?
The five partner states of the East African Community have agreed to a protocol for the East African Monetary Union (EAMU) that sets out a 10-year programme for the transition to EAMU scheduled for the introduction in the first half of 2020s.
This is a fundamental decision because our heads of state had been assumed to mean that single currency will be with us soon. From now, no one will talk about single currency until 2020.